Highly efficient internal controls indicate a strong control environment and management’s commitment to risk management. Hence, efficient internal controls are expected to reduce audit risk, reduce audit procedures, and requires less time to execute the audit function.
Conceptual understanding
As part of preliminary audit procedures, the auditors assess the risk of material misstatement and the operational efficiency of the business’s internal controls.
If the auditor concludes that implemented internal controls are operationally effective, so, the engagement risk is lower. Hence, auditors can plan limited audit procedures to obtain reasonable assurance.
What types of controls is the auditor expected to test?
The auditor is expected to implement internal controls related to financial reporting and compliance. For instance, implemented controls on transactions in the accounting system, posting adjusting entries, and preparing the general ledger, trial balance, and financial statements.
Applicable controls on the financial reporting include review, approval, authorization, accuracy check, and overall control environment.
Conclusion
Efficient internal controls are expected to reduce audit risk, leading to reduced audit procedures. On the contrary, weak internal controls lead to higher audit risk and extended audit procedures.
The auditor is expected to test controls such as review, approval, authorization, and the overall control environment during risk assessment.
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